Introduction

In recent years, various measures have been introduced in the development plan of the Guangdong-Hong Kong-Macao Greater Bay Area (“Greater Bay Area”) in order to facilitate Hong Kong citizens to purchase properties in the mainland cities of the Greater Bay Area. For example, the loan procedures are simplified and Hong Kong residents will be treated as local residents in purchasing properties in the mainland cities of the Greater Bay Area. It means that in most cases they will no longer be required to provide evidence of their duration of residence, study or employment, or meet the conditions on the payment of individual income tax and social security. Whilst the new policies have attracted more Hong Kong residents to purchase properties in the Greater Bay Area, more property scam cases are reported. Some purchasers were attracted by the high “guaranteed rental return” which was later found to be unachievable. Other property scam cases mainly concerned with incorrect description of the properties or even the non-existence of the so-called property project.

In light of the growing trend of purchasing properties in the Greater Bay Area, this article discusses some legal issues in relation to review of property certificate and permit and contract for sale of property that property investors are reminded to be cautious of in order to minimise their risks when making investment in the Greater Bay Area property market.

Property Certificate and Permit

Purchase of first-hand properties

When investors plan to purchase first-hand properties in the mainland cities of the Greater Bay Area, they are advised to invest in property projects that are developed and sold by reputable developers and agents. Proper enquiries should be made to ensure that they have obtained (i) State owned land use certificate (國有土地使用證); (ii) Construction land planning permit (建設用地規劃許可證); (iii) Construction project planning permit (建設工程規劃許可證); (iv) Construction permit (建築工程施工許可證); and (v) Permit of advance sales of commercial houses (商品房預售許可證) (“Permit of Advance Sales”) in respect of the properties in accordance with the Urban Real Estate Administration Law of the People's Republic of China (“Urban Real Estate Administration Law”):

Article 55 of Urban Real Estate Administration Law and Articles 5-8 of Procedures for the Administration of Advance Sale of Commodity Houses in Urban Areas require the developers to, amongst others, provide copies of the first four permits abovementioned, prove that it has invested funds exceeding 25% of the total construction project budget, and determine the construction schedule and date of completion when they apply for the Permit of Advance Sales, in order to provide better protection to the potential investors. Any pre-sale agreements entered into with developers with no Permit of Advance Sales in respect of the subject properties may be held as void.

Therefore, it is essential for the first-hand property investors to inspect the Permit of Advance Sales to ensure that the developers are legally authorised to conduct the pre-sale of properties and confirm that the subject property is a first-hand property and matches with the descriptions stated in the marketing materials.

Purchase of second-hand properties

For potential purchasers of second-hand properties, they are advised to inspect the property ownership certificate (不動產證) as well as conduct a land search at the property registration centre (不動產登記中心) to ascertain if the seller is the legal owner of the property on record and any mortgage is registered against the property. Purchasers should also conduct a physical inspection of the property to confirm that no one currently occupies the property and no tenancy agreement is entered in respect of the property.

Due diligence

As the inspection of the properties and relevant certificates and permits may involve searching and checking of legal and government official documents, purchasers are advised to seek professional legal advice and conduct a due diligence in advance.

Precautions when signing documents

Terms and conditions

In general, purchasers will need to sign the sale and purchase agreement (the “SPA”), and sometimes a preliminary agreement (認購協議書) before the SPA for the property and the terms and conditions will be quite beneficial to the developer and the management company. Some purchasers are not aware of the fact that sales term are sometimes negotiable in first-hand mainland property sales. Even though it is difficult for the purchasers to negotiate or modify the terms and conditions as set out in the template agreements, the purchasers may still negotiate for less initial deposit, extended deadline for completion, flexible payment method, more discount, etc. which are beneficial to the purchasers.

When signing agreements, purchasers should check the terms concerning the relevant parties, to make sure who is the party they pay to, who is the developer, who is the guarantor for the developer, who will be responsible if any problems occur in the future, etc. Moreover, purchasers should be on the alert for any earnest money (誠意金) or other payment of the similar nature. Such payment is not mandatory under the law. However, some unscrupulous developers or the management companies may draft the clause to the effect that the money will never be returned if the transaction fails to complete even if no default or breach on the purchasers’ side. Therefore, it would be cautious to review the terms and conditions before signing the SPA or preliminary agreement, and recommended to engage lawyers for the review especially when such documents are for major investment.

Misleading marketing material

Some developers may promise that their properties have good rental return and exaggerate related occupancy rates to encourage purchasers to complete transactions while the actual situation is not the same as promised. It must be addressed that such high rental return is not that guaranteed. When signing the SPA, it is normally a management company rather than the developer to be liable for realising the “promise” of the rental return rate. In such cases, the management company does not own assets but is only used as a vehicle to arrange payments and transactions, meaning that the purchasers will not be able to sue the developer for any loss relating to the so-promised return rate. As such, it is advised to check the background of the relevant developer and agency in advance, and check other properties near the property for sale as reference before making the decision.

Moreover, the purchasers may find that the properties turn out to be inconsistent with the original description when they signed the SPA, including significant inconsistencies such as being totally different from the sample apartment as displayed, to some minor issues such as cracks on the wall, indentations in the floor, not-up-to-standard green area etc. In this connection, when signing the SPA, the purchasers shall make sure if the descriptions have been incorporated in the SPA and who will be liable for the breaches. It has to be reiterated that if the responsible party is not the developer but some kind of management companies, such companies normally do not have any assets, meaning taking legal action against them is of no use.

Conclusion

As an old saying goes, “there ain’t no such thing as a free lunch”. When purchasing properties in the Greater Bay Area, investors or purchasers should not only trust online sales advertisements or unscrupulous agencies. It is recommended to purchase properties developed by reputable developers which have all certificates and permits as they provide more security in terms of legitimacy, price, property quality, and property management, etc. At the same time, it must be reiterated to focus on the property itself and conduct a thorough due diligence check before entering into any agreements rather than only relying on the high return rates as advertised which in most cases turn out to be fake. In some circumstances, especially when the SPA is for major investment, the purchasers are advised to consult lawyers to better protect their interest and benefits.